Snowflake S-1 Teardown

Brad Otto
10 min readAug 31, 2020

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This post was co-authored with Shreyas Nair.

Snowflake, one of Silicon Valley’s most hyped unicorns, filed for an IPO last week. While not a household name today, Snowflake could prove to be one of the most successful venture-backed startups in recent memory.

In this post we unpack everything investors should know from the S-1 and share an initial valuation target for the company. We are classmates and Rock Venture Partners at Harvard Business School with experience in venture capital, private equity, and consulting.

Problem

While working at Oracle in 2012, Snowflake co-founders Benoit Dageville and Thierry Cruanes stumbled upon the realization that existing data warehousing solutions could not compete with next generation solutions like Hadoop in the new big data era. Further, there didn’t exist a system that fully leveraged the elasticity of the cloud. Recognizing this gap, the duo along with their third co-founder Marcin Zukowski (co-founder of the Dutch start-up Vectorwise at the time) launched Snowflake, operating in stealth mode until October 2014.

At that time, legacy big data solutions were rigid and expensive. Further, the supposed next-generation Hadoop systems were slow, inefficient, and too difficult to use. This provided the perfect opportunity for a disruptive new entrant. Snowflake built a system that ran 10x faster and also freed users from tiresome management tasks.

Today Snowflake’s vision is to create a world where “organizations have seamless access to explore, share, and unlock the value of data.” The company’s cloud data platform enables customers to use data to build applications, derive insights, and share information all from a single source of truth. As of January 2020, Snowflake estimates its addressable market to be a cool $81 billion.

Investors seem to be on board considering the company has raised $1.4 billion in venture capital funding from the likes of Sequoia, Sutter Hill, Altimeter, Redpoint, and Madrona.

Product Overview

Snowflake’s cloud data platform enables customers to consolidate analytics across data warehouses, data lakes, and data marts into one source of truth.This simplifies data sharing and minimizes data governance and compliance issues.

Use cases include data engineering, data lakes, data warehousing, data science, data applications, and data exchange. Customers can use the platform for any one of these use cases, but when taken together as a fully-integrated solution it provides greater insights and faster performance.

Source: Snowflake S-1 filing

Snowflake is built on an innovative multi-cluster shared data architecture on three major public clouds across 22 regional deployments globally. This architecture provides a seamless user experience around the world and allows customers to store data on any cloud (including Amazon, Microsoft, and Google) in any region.

Source: Snowflake S-1 filing

Market Landscape

The data services and warehousing market has seen a dramatic change over the last few years. Players within this market broadly fit into 3 archetypes:

  1. Traditional data warehouses (legacy): Teradata, Oracle Exadata, IBM Netezza, Vertica, Greenplum
  2. Open source big data architectures: Cloudera, Hortonworks (now part of Cloudera), MapR, Databricks
  3. Cloud data warehouses: Snowflake, Amazon Redshift, Microsoft Azure data warehouse, Google Big Query

The transition of data and analytics workloads to the cloud has accelerated across most organizations around the world. However, many of the legacy players (e.g. Teradata, Netezza) have been slow to pivot and haven’t made the transition so successfully. These legacy database architectures have inherent scalability and capacity constraints and were not originally designed for the adoption of cloud-based workloads. These shortcomings have resulted in data silos, governance challenges, and limited business insights. Big data architectures (e.g. Cloudera) have attempted to solve the problem of data silos with large pools of cost-effective storage, but in doing so have often created data integrity and governance challenges. This presented a new opportunity within this market which gave rise to the ‘next generation’ of cloud-based companies i.e. Snowflake.

In recent years, cloud-based companies, including certain public cloud providers, have introduced solutions that are derived from legacy database and big data architectures. This transition from on-premise to cloud provides a strong tailwind for Snowflake that has mainly grown on the back of replacing the more traditional incumbents. As this market matures, Snowflake will have to compete with the offerings of the three largest cloud providers- AWS, Microsoft Azure and Google Cloud Platform. However, given the growing demand for multi-cloud infrastructure, top organizations would want to use a solution that is independent (like Snowflake) rather than trusting a cloud provider software whose features might be better suited for their own cloud infrastructure. Today, most of the competition comes from AWS Redshift but over time, we expect the strongest competition to come from Microsoft, who are in the process of announcing several new offerings in the data management and warehousing space.

Across software review platforms G2 Crowd and Trust Radius Snowflake has come out as the most preferred software provider. To ensure competitiveness, Snowflake has been continuously releasing features and slowly evolving into an all-encompassing cloud data platform from a mere cloud data warehouse.

Business Model

Unlike typical SaaS businesses, the majority of Snowflake’s revenue is delivered under capacity arrangements in which customers commit to a certain level of consumption at specified prices. These utilization-based contracts are typically written with a one-year term and paid up front. The company recognizes revenue as customers consume capacity. The remaining amount of contracted future revenue that has not yet been recognized is referred to as remaining performance obligations (RPO). Customers may consume more than their contracted capacity, and unused capacity can be rolled forward to future periods.

Source: https://www.snowflake.com/

Go-to-Market

As of July 31,2020 Snowflake had 3,117 total customers (2x from 2019), including seven of the Fortune 10 (4% revenue contribution) and 146 of the Fortune 500 (26% revenue contribution). 56 customers contributed more than $1 million in trailing 12-month product revenue.

A large reason why the company has been able to scale at such a rapid pace is its 3-pronged sales and marketing approach:

  1. An account based marketing (ABM) strategy helps salespeople ruthlessly prioritize high value, good-fit clients. This is evident with its >$1M revenue customers growing 2.5x times from 22 to 56 over the last year.
  2. Lead to account matching technology coupled with unique account engagement tracking helps deliver a top quartile customer experience (refer to G2 crowd & trust radius ratings above).
  3. Finally, the company splits its 3,000+ customers into 2 tiers: Tier 1 (~300); Tier 2 (remaining), enabling efficient sales and marketing expenditure.

Snowflake’s S&M expenditure as a % of sales has come down from 131% (6-month period till Jul’19) to 78% (same time period Jul’20).

The company also benefits from powerful network effects. The more customers adopt its platform, the more they can share and receive data from other customers, partners, and data providers. This in turn creates a more valuable experience for all Snowflake customers. The S-1 highlights an awesome case study of the Starschema COVID-19 data set, available on Snowflake’s data marketplace, to illustrate this network effect.

Source: Snowflake S-1 filing

“The chart [above] illustrates the data sharing between Snowflake accounts from February 1, 2020 to July 31, 2020. The blue circle at the center of the cluster represents the hundreds of Snowflake customers that consumed the Starschema COVID-19 data set.”

Perhaps most importantly, Snowflake’s net revenue retention rate was 169% for the year ending January 31, 2020. Net revenue retention rate measures the growth in use of the platform from existing customers. It’s hard to understate how impressive that is. If Snowflake would have taken on ZERO new customers in 2020 the business would still have grown 69%!

Business Performance & Financials

Snowflake generated revenues of $265 million and $97 million for the years ending January 31, 2020 and 2019, respectively. That’s a whopping 174% revenue growth year over year.

The growth story gets even better when you look on a quarterly basis. Since October 2018 the company has grown revenues at a 25% clip on a quarterly compounded basis. In addition to massively growing revenue, Snowflake has also expanded its gross margin from 52% to 62% over the past 7 quarters.

Source: Snowflake S-1 filing & author analysis

As with most SaaS businesses, GAAP accounting does not tell the full story of Snowflake’s performance. One key non-GAAP metric highlighted in S-1 is remaining performance obligations (RPO), which has exhibited massive growth over the past eight quarters.

Source: Snowflake S-1 filing & author analysis

The company looks even better when stacked up next to its peer group. Using the ‘Data & Analytics’ Saas comp group from Public Comps, we can see that Snowflake excels against peer companies across key SaaS metrics.

CURRENT QUARTER REVENUE GROWTH

Source: Public Comps — Data & Analytics dashboard

Snowflake’s current quarter revenue growth is more than 2x the next closest in this peer group, MongoDB and ~6x the average for the group.

RULE OF 40 (CURRENT FCF)

Source: Public Comps — Data & Analytics dashboard

The rule of 40, which is the sum of revenue growth and current quarter FCF %, levels the playing field between younger and older software companies. Snowflake still handily beats the peer group average by ~10x.

GROSS MARGIN

Source: Public Comps — Data & Analytics dashboard

Snowflake’s gross margin is at the bottom of the peer group at 62%. However, as we highlighted above the company has improved 10 percentage points from 52% less than two years ago. With further product tweaking and improved economics from the cloud provider these margins should stabilize in the low 70% range in steady state. However, Snowflake might never get to the mid-high 80% gross margins that other SaaS companies typically boast of given the heavy third-party cloud infrastructure expenses in its cost of revenue.

CURRENT FREE CASH FLOW %

Source: Public Comps — Data & Analytics dashboard

At negative 19% free cash flow Snowflake is slightly better than average. When analyzing this free cash outflow (thanks WeWork!), it’s important to consider the company’s relative youth compared to this peer group. We expect FCF to continue its upward trend from previous periods as the company matures and gains operating leverage.

Finally, Snowflake’s EBIT losses for the years ending January 31, 2020 and 2019 were ($358) million and ($185) million, respectively. These are large, yet relatively unconcerning numbers. Snowflake’s staggering growth and improving margins show a clear path to positive free cash flow and net profitability.

Valuation

Snowflake was last valued at $12.4 billion in the private markets when Dragoneer & Salesforce Ventures led its massive Series G round on February 7, 2020. We expect public market investors to value Snowflake on a multiple of next-twelve-month’s revenues. The median EV/2020 revenue multiple for the data & analytics set below is 10.7x.

DATA & ANALYTICS — EV/2020 REVENUE

Source: Public Comps — Data & Analytics dashboard

By extrapolating Snowflake revenues to steady state (over the next 5Y) with a 50% CAGR and applying a similar multiple we can see a $45B company in the making. Discounting the enterprise value to present at a discount rate of 20% shows us that an enterprise valuation of $18–18.5B is a reasonable ask from Snowflake. This would imply a ~24x NTM revenue multiple (assuming 2020 revenues as $530M & 2021 revenues as $1B) which is around the median multiple for high growth SaaS companies today (see below). We believe these assumptions to be on the conservative side.

HIGH GROWTH SAAS — EV/2020 REVENUE

Source: Public Comps — High Growth SaaS dashboard

The Bottom Line

Snowflake is clearly a special company. It has a lot going for it: a secularly growing market, differentiated product positioning, strong customer love, an optimized sales and marketing engine among other things. This promises to be yet another rockstar 2020 SaaS IPO.

One key risk for investors to keep in mind is the looming threat from Amazon, Google, and Microsoft. However, the platform shift to multi cloud has placed Snowflake in a unique, position posing questions on how the large cloud-provider incumbents will address customer trust concerns and on their ability to build an effective multi cloud solution.

A special thank you to Jeff Bussgang for helping with this post.

Disclosure: We are not financial advisors, and this post is not meant to be investment advice. We are not investors in Snowflake.

Sources

  1. Snowflake Inc. S-1 Filing
  2. Public Comps
  3. Snowflake Founder Interview
  4. Snowflake Account-Based Marketing
  5. How Snowflake Drove 300% Growth in 15 Months

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